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A recent report by the Chamber of Indian Industries pointed out that globally real estate is and should always be considered as an income-generating asset. Indeed, real estate is an attractive investment option, as it gives regular returns and also provides capital appreciation. This scenario is presently unfolding in India.
Before the start of the 1990s, real estate was always looked upon as a place to invest money, since prices were always escalating because of limited supply and heavy demand. Developers were building residential and commercial projects, which were sold out even before the construction began. Besides, during the course of construction, the property changed hands several times before the completion of the project, with further price increases.
But, those days are gone with the crash of the housing market in the mid 1990s. The higher the rise in real estate prices, the steeper the fall. This was true, especially, in the metros, e.g. Mumbai and New Delhi. The supply increased enormously and the demand remained steady, as prices had gone beyond the realistic levels. This decline in prices stabilised towards the end of the decade as rates became more reasonable and affordable. In the meantime, the housing finance industry started to expand rapidly, making home loans easily available to everyone. Besides the housing loans boosting the market demand, the tax benefits provided by the last four consecutive budgets have also encouraged the end-users and investors alike. Growing incomes of urban buyers coupled with fiscal incentives and falling interest rates, has seen disbursements by Housing Finance Companies grow at over 35% per annum in the past few years, as shown in Figure I.
Figure I
To evaluate real estate as an investment option, use the following guidelines.
- Check out the various loan options to raise the finances.
- Ensure that there is scope for infrastructure development around the property under consideration.
- Another factor is the location and the proximity to schools, hospitals, markets, public transportation, etc.
- Check out the rental returns and capital appreciation potential in the area where the property is located.
- Actual property taxes to be paid.
- Finally, ensure that you are able to maximize the tax benefits to the limit.
The rental rates in India are among the highest in the world as returns on investment on the capital value of the property. Figure II compares the rental returns for various cities all over the world with the Indian cities. Investment in commercial property, where the returns are 10 to 15 per cent, is a proven option, while residential property is always in demand for leasing.
Figure II
Since the 9/11 attack in the US, investments in Indian markets have gathered pace. India has encouraged Non Resident Indians (NRIs) with tax incentives and relaxation of foreign direct investments (FDI) rules. The sudden change in sentiments is clearly visible in India’s bulging foreign exchange reserves, which are at a record high of over 60 billion US dollars. And the RBI has relaxed the rules further for NRIs with respect to repatriation of foreign exchange on real estate investments. Besides being a safe destination, India offers 10 to 12 per cent returns, perhaps the highest in the world. 30 per cent of all high major real estate transactions in Mumbai are accounted by NRIs.
Moreover, with increasing volatility in stock markets and falling interest rates, many investors have started considering investment in commercial and residential properties. The bottom-line is that this is the time to go shopping for property; as the market has started firming up already. As the organised market develops, real estate as an investment is one of the better options available today. As Naresh Malkani, CEO of Indiaproperties, says, “Considering the current property rates and housing loan interest rates, it is worth investing in real estate in India.”
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